Key Bank of ME v. Tablecloth Textile, 1st Cir. (1996)

7/26/2019 Key Bank of ME v. Tablecloth Textile, 1st Cir. (1996)

1/47

USCA1 Opinion

UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

____________________

No. 94-2044

KEY BANK OF MAINE,

Plaintiff - Appellee,

v.

TABLECLOTH TEXTILE COMPANY

CORPORATION, ET AL.,

Defendants - Appellants.


2/47

____________________

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MAINE

[Hon. Morton A. Brody, U.S. District Judge] ___________________

____________________

Before

Torruella, Chief Judge, ___________

Lynch, Circuit Judge, _____________

and Stearns,* District Judge. ______________

_____________________

Eric A. Deutsch, with whom Testa, Hurwitz & Thibea _________________ ________________________

Peter G. Cary and Mittel, Asen, Eggert, Hunter & Altshuler_____________ _________________________________________

on brief for appellants.

Thomas A. Cox, with whom Jennifer S. Begel and Fried

______________ _________________ _____

Babcock were on brief for appellee. _______


3/47

____________________

January 30, 1996

____________________

____________________

* Of the District of Massachusetts, sitting by designation.

TORRUELLA, Chief Judge. Defendants-Appell TORRUELLA, Chief Judge. ______________


4/47

Tablecloth Textile Company Corp., ("Tablecloth"), Post & She

Textile Company, Inc. ("P&S") and Stuart Sherman ("Sher

(collectively referred to as the "Appellants") appeal the de

of their motion to set aside a default judgment and for lea

file a late responsive pleading. We reverse, holding

because the notice requirement of Rule 55(b)(2) of the Fe

Rules of Civil Procedure was not observed, and because Appell

provided strong evidence that the damage award was erroneo

calculated, the default judgment must be set aside and the

remanded for further proceedings consistent with this opinion

I. BACKGROUND I. BACKGROUND __________

The record in the present action reveals the follo

The dispute underlying this appeal arose out of the sal


5/47

assets, particularly the licenses and inventory of a

corporation which was in default on its obligations to Plaint

Appellee Key Bank of Maine ("Key Bank" or the "Appellee").

December 27, 1993, Key Bank commenced an action against

Appellants by filing a complaint in the U.S. District Court

the District of Maine, alleging that Tablecloth breached

obligations to Key Bank under various contracts and promis

notes and that Sherman and P&S were jointly and severally li

along with Tablecloth pursuant to an executed guaranty

January 13, 1992. On December 30, 1993, service was made on

Appellants. The answer to the complaint was due on January

-2-


6/47

1994, a date which came and passed with Appellants filing nei

an answer nor a formal appearance.

On January 10, 1994, Key Bank's Maine counsel, La

B. Perzley, received a telephone call from Appellants' t

counsel in New York, Stephen Brown, indicating that Appell

wanted to pursue settlement negotiations. Perzley recei

similar telephone call on January 20, 1994, from Sher


7/47


8/47

that settlement negotiations had failed; (iii) that prior

seeking a default judgment, Key Bank would notify Fischer so

Appellants could seek Maine counsel and file the appropr

pleadings; and (iv) that, if negotiations failed, the lett

settlement offer would not prejudice either party's positio

-3-

litigation. The February 1 letter also discussed "behin


9/47

scenes"circumstances thatprovided groundsfor Appellants'defen

In response, Lugli penned a letter dated Februar

1994 (the "February 4 letter"), indicating Appellee's willin

to enter into negotiations, if they "could be accompli

quickly." The letter requested financial information, encl

Key Bank forms to be used, provided a February 16, 1994 deadl

and stated that Lugli would "instruct counsel to continue

the legal proceeding" were the deadline not met. Appellants

not submit the financial information by the deadline. Fis

maintains that although she received the financial questionn

meant to be completed and submitted by Sherman, she "do[es]

recall" whether the package contained "a demand letter fro

Bank" dated February 4, 1994, indicating that a default woul


10/47

sought unless all requested information was presented to Key

by February 16, 1994.

On February 25, 1994, Key Bank filed a response to

court's order to show cause why the action should not

dismissed for lack of prosecution along with an application

the district court clerk for entry of the default. Althoug

Bank was aware that Appellants were represented by counsel

had requested notice before Key Bank sought to have def

entered, it chose not to serve Appellants with those papers.

February 28, 1994, the clerk entered a default in favor of

Bank under Fed. R. Civ. P. 55(a) because of Tablecloth's fai

to file a responsive pleading. On April 1, 1994, Appellee f

-4-


11/47

a motion for a default judgment, once again choosing not to s

Appellants. On April 8, 1994, the district court entered

default judgment ex-parte in the amount of $693,871.44, base

the affidavits and the unanswered request for admiss

submitted by Key Bank.

During oral argument counsel for Key Bank admitted

Key Bank never sent Appellants notice of, or copies of

pleadings filed in connection with, these court actions.


12/47

Bank further conceded that Appellants only learned of the e

of the default and of the default judgment in July 1994, when

Bank's counsel, David Burke, contacted Fischer (who no longer

involved in the matter) to discuss execution of the judg

Burke was referred to John Stahl, the controller for Po

Sherman, and they conducted settlement discussions through

remainder of July. Burke rejected a settlement offer on July

1994, and informed Stahl that if a satisfactory settlement

not reached by August 1, 1994, Appellee would enforce

judgment. On July 25, 1994, Lugli received the finan

information requested in February 1994 from Sherman.

The parties failed to reach a settlement by Augus

1994. Accordingly, on August 15, 1994, Appellants filed a mo


13/47

to set aside the default judgment and a motion to allow a

answer, along with supporting affidavits that detailed

inaccuracies of the damages as established by the unans

request for admissions. On September 2, 1994, the district c

denied Tablecloth's motion to set aside the default judgment

-5-

for leave to file a late responsive pleading (the "motion").


14/47

district court stated that Appellants failed to meet their bu

under Fed. R. Civ. P. 60(b), because their conduct did

constitute excusable neglect and they did not provide suffic

elaboration permitting the district court to determine that

had a meritorious defense (the "Order"). This appeal was f

on September 29, 1994. We have jurisdiction pursuant t

U.S.C. 1291.

II. DISCUSSION II. DISCUSSION __________

Despite the additional issues raised, dispositio

this appeal begins and ends with the inquiry into whether

district court erred when it denied Appellants' motion to

aside the default judgment entered against them. We revie

denial of a motion to set aside a default judgment for an a


15/47


16/47

Cir. 1993) (discussing motion for Rule 60(b) relief); LeShore______

County of Worcester, 945 F.2d 471, 472 (1st Cir. 1 _____________________

(explaining motion for Rule 55(c) relief); U.S. v. One Urban____ ________

Located at 1 Street A-1, 885 F.2d 994 (1st Cir. 1989) (no ________________________

that review of motions for relief under Rule 55(c) is

demanding than that governing those seeking relief under


17/47

60(b)); see also In Re Roxford Foods, Inc., 12 F.3d 875 (9th________ _________________________

1993).

In their appeal of the denial of their motion to

aside default judgment, Appellants argue that they "appeare

the action below for purposes of Rule 55(b)(2)2 and, thus,

entitled to written notice3 three days prior to the entry of

default judgment. Appellants contend that because Appe

failed to satisfy the notice requirement of Rule 55(b)(2),

____________________

shall be made within a reasonable time,

and for reasons (1), (2), and (3) not

more than one year after the judgment,

Order, or proceeding was entered or

taken.

2 Fed. R. Civ. P. 55(b)(2) reads, in pertinent part:

If the party against whom judgment by


18/47

default is sought has appeared in the

action, the party (or, if appearing by

representative, the party's represen-

tative) shall be served with written

notice of the application for judgment at

least 3 days prior to the hearing on such

application.

3 We note that although written notice is contemplated under

Rule, it need not necessarily be in any particular form.

major consideration is that the party is made aware tha

default judgment may be entered against him." Wilson, 564______

at 369 (quoting 10 C. Wright & A. Miller, Federal Practice_______________

Procedure 2687 (1973)). _________

-7-


19/47

district court abused its discretion when it denied their mot

because, in so doing, it implicitly held that Appellee was

required to provide them with notice.4 Predictably, Appe

disputes that Appellants appeared below and maintains that, u

Rule 5(a), it was not required to provide Appellants with no

of the default pleadings.5

Although appearance in an action typically invo

some presentation or submission to the court -- a feature mis

here -- we have held that a defaulting party "has appeared"

Rule 55 purposes if it has "indicated to the moving party a c

purpose to defend the suit." Mu iz v. Vidal, 739 F.2d 699,

_____ _____

(1st Cir. 1984) (quoting H.F. Livermore Corp.


20/47

________________________

Aktiengesellschaft Gebruder Loepfe, 432 F.2d 689, 691 (D.C.__________________________________

1970)). Our review of both the case law we cited in Mu iz_____

the decisions since Mu iz reveals there is ample support for_____

finding that Appellants' "informal contacts" with Key

____________________

4 We note that the district court's Order does not inclu

discussion of why Appellants failed to satisfy the requi

showing of excusable neglect and meritorious defenses for re

under Rule 60(b). Although absence of record indication

proper standards were applied in refusing to set aside a def

has been held sufficient by itself to justify reversal, we

not decide this case on that limited basis. Keegal v. Key We______ _____

Caribbean Trading Co., Inc., 627 F.2d 372, 374 (D.C. Cir. 1 ___________________________

(citing Medunic v. Lederer, 533 F.2d 891 (3d Cir. 1976))._______ _______

5 Rule 5(a) provides that:


21/47

No service need be made on parties in

default for failure to appear except that

pleadings asserting new or additional

claims for relief against them shall be

served upon them in the method provided

for service of summons in Rule 4.

-8-

demonstrated a clear intent to defend, and thus that

"appeared" in the action below.6

Here, Appellants "indications" of their intent


22/47

primarily evidenced by the February 1 letter from Fische

Lugli. The letter, supplemented by affidavits on rec

demonstrates that Fischer explained to Lugli that, because

P&S and Sherman had limited access to funds and were conside

bankruptcy, available funds were better spent on the busin

repaying Key Bank, and negotiating a settlement, than

litigating the matter. More importantly, the February 1 le

made clear Appellants' understanding that (i) the letter se

to commence settlement negotiations; (ii) during the negotiat

Key Bank "will forbear from filing a default motion base

[P&S's] failure to answer [in the action below]"; (iii) if

____________________

6 See, e.g., Lutomski v. Panther Valley Corn Exchange, 653

___ ____ ________ ____________________________

270, 271 (6th Cir. 1981) (finding appearance where defen

contacted plaintiffs and made clear that the damages sought


23/47

excessive); H.F. Livermore, 432 F.2d at 691 (finding appear _______________

where exchanges between parties were normal effort to se

dispute could be settled and neither party doubted that

would be contested if efforts failed); Dalminter v._________

Edwards, 27 F.R.D. 491, 493 (S.D. Tex. 1961) (finding appear _______

where defendant contacted plaintiff's counsel by letter);

also Keegal v. Key West & Caribbean Trading Co., Inc., 627

____ ______ _______________________________________

373, 374 (D.C. Cir. 1980) (finding, inter alia, that assura __________

upon which defendants relied were part of, and grew out

settlement negotiations which courts seek to encourage); Lib __

National Bank and Trust Co. v. Yackovich, 99 F.R.D. 58 (W.D.P ___________________________ _________

1982) (setting aside default judgment because failure to an

was based upon reliance on agreement with plaintiff's cou

that notice would be provided prior to seeking default judgme

Cf. J. Slotnick Co. v. Clemco Industries, 127 F.R.D. 435, 43 ___ _______________ _________________

(D.Mass. 1989) (finding defendant did not appear where defen

was served with copy of plaintiff's motion for default, rece

notice from court clerk of entry of default, failed to respon

either plaintiff's motion or clerk's notice, and never displ

a clear purpose to defend).

-9-


24/47


25/47

its review of the facts involved and the bases for Appella

settlement offer, also detailed Appellants' defenses

counterclaims in the event settlement negotiations failed.

Contrary to Appellee's assertions, once Appell

"appeared" for Rule 55 purposes they were entitled to notic

the application for default judgment under Rule 55(b)(2).

disagree with Appellee's argument that they were not require

provide notice under Rule 55(b)(2) because their Februar

letter effectively cancelled the intent to defend demonstrate

Appellants' February 1 letter. Specifically, Appellee ar

that when the February 4 letter is considered together

Appellants' failure to respond by the February 16, 1994 deadl

it becomes clear that Appellee was not itself "on notice

February 1994 that Appellants had a clear intent to def


26/47

Appellants' failure to meet the deadline, Appellee maintains,

but another example of their "history of non-responsiveness."

We find Appellee's argument thoroughly unpersuasive

not disingenuous. Appellants only two weeks before communic

-10-

a clear intent to defend.7 Appellee also knew that Appell


27/47

____

were represented by counsel. Moreover, Appellee was well a

of Appellants' need to retain Maine counsel and of Appella

understanding that notice would precede Appellee's seeking e

of default. It was Appellee's duty when seeking entry of def

and judgment by default to apprise the district court

Appellants' February 1 letter and to give notice as contempl

under Rule 55(b)(2).

In addition, we are unpersuaded by Appellee's att

to distinguish this case from Mu iz. Appellee argues t _____

unlike in Mu iz, the February 4 letter specifically_____

Appellants on notice that "if [Lugli] does not receive

[financial] information prior to [February 16, 1994], [Lu


28/47

will instruct counsel to continue with the legal proceedi

Appellee relies on a case we distinguished in Mu iz, Wilso_____ ____

Moore & Associates, Inc., 564 F.2d 366, 369 (9th Cir. 1 __________________________

(finding defendant's "informal contacts" insufficient

constitute an appearance because "plaintiff's 'informal conta

provided actual, unqualified notice that delay would resul

default"). Even assuming receipt of Key Bank's Februar

letter,8 we do not find that Appellee's February 4 letter,

____________________

7 We note that during oral argument, counsel for Appe

conceded that the February 1 letter, viewed on its

demonstrated Appellants' intent to defend.

8 We resolve the factual question as to Fischer's receipt of

February 4 letter in favor of Appellants because of the st

policy favoring resolving disputes on the merits. LeShore,_______


29/47

F.2d at 472 (quoting Coon, 867 F.2d at 76). ____

-11-

referred to "instruct[ing] counsel to continue with the l

proceeding," to amount to "actual, unqualified, notice that

would result in default." As we noted in Mu iz, in Wilson_____ _____

defendant there neither filed a paper in court nor conta

opposing counsel. Mu iz, 739 F.2d at 701; see Charlton L._____ ___ ____________


30/47

& Co., P.C. v. Fedder Data Center, Inc., 556 F.2d 308, 309___________ ________________________

Cir. 1977) (noting that cases where actual notice of impen

default judgment was given do not provide guiding precedent

situations in which no notice of any sort was given).

Appellants here did not file any court documents, because of

agreement to pursue settlement negotiations and the nee

retain Maine counsel, they did contact opposing coun

explicitly communicated their intent to defend and t

understanding that Appellee would provide notice prior to see

default so that they could retain Maine counsel.

Furthermore, Appellants presented strong evidence

the figures upon which the default judgment is premised

erroneous.9 While Appellants' evidence does not indicate


31/47

possess an "ironclad claim or defense which will guara

success at trial," Teamsters, 953 F.2d 17, 21, the evi _________

regarding the damages "does establish that [Appellants] posse

____________________

9 We note that the fact that P&S and Sherman have sought

received protection under the United States Bankruptcy Code

not affect our consideration of the issue of damages.

though all actions in this appeal are stayed as respect to

and Sherman pursuant to 11 U.S.C. 362 (1994);

Commerzanstalt v. Telewide Systems, Inc., 790 F.2d 206, 207______________ _______________________

Cir. 1986); Association of St. Croix Condominium Owners v.____________________________________________

Croix Hotel, 682 F.2d 446, 449 (3d Cir. 1982), they are___________

stayed as respect to Tablecloth.

-12-


32/47

potentially meritorious claim or defense which, if proven,

bring success in its wake," at least as to the amount of dama

Id. The amount of damages involved is substantial, an__

record suggests that the damage award is possibly erroneous b

much as $611,870. Thus, Appellants have given us good reaso

believe that setting aside the judgment will not be a fu

gesture. Id. at 20 (stating that a litigant, as a precondi __

to relief under Rule 60(b), must give the trial court reaso

believe that vacating the judgment will not be an e

exercise); Swink v. City of Pagedale, 810 F.2d 791, 792 n.2_____ ________________


33/47

Cir. 1987) ("There is a strong public policy, supporte

concepts of fundamental fairness in favor of trial on the mer

particularly when the monetary damages sought are substantial

Lutomski, 653 F.2d at 271 (remanding case for a damages hea ________

where defendants conceded liability yet presented st

arguments that damages awarded were excessive).

Finally, contrary to Appellee's claim, there is not

in the record to suggest that Appellants would not defend

suit once settlement negotiations failed.10 We also note

Appellants' motion to set aside the default judgment (

August 15, 1994) was reasonably timely, considering that

____________________


34/47

10 We note that in addition to the February 1 letter,

discussed the grounds for Appellants' defenses, Key Bank

aware of potential defenses and counterclaims as early

December 1992 when it received a letter sent by Fischer,

December 11, 1992, discussing why P&S was not in default on

notes.

-13-

only learned of the default and the default judgment in July

and that negotiations continued until August 1, 1994.

In sum, because we find that Appellants prese


35/47

sufficient evidence of their intent to defend, they "appeare

the action below, such that they were entitled to notice u

Rule 55(b)(2) of Appellee's application seeking the def

judgment.11 We consider Appellee's failure to provide

requisite notice a grave error, we hold that the lack of not

coupled with Appellants' showing of the existence o

potentially meritorious defense (at least as to the amoun

damages), requires that the default judgment be set asi

See Rule 60(b)(4), (6) (permitting judgment to be set aside___

judgment is shown to be "void" or for "any other re

justifying relief"). The district court abused its discre

____________________

11 By thus holding, we do not suggest that district co

should be compelled to vacate default judgments wheneve


36/47

defendant communicates with the plaintiff after service of

complaint. See Wilson, 564 F.2d 370-71 (Wright, J., dissent ___ ______

("I do not share the majority's fear that reversal here

compel district court's to vacate default judgments whene

defendant communicates with the plaintiff after service of

complaint."). Instead, we simply re-affirm our rule

defendants who "appear" through informal contacts demonstrati

clear intent to defend are entitled to notice under

55(b)(2). Cf. Taylor v. Boston and Taunton Transportation___ ______ __________________________________

720 F.2d 731, 733 (1st Cir. 1983) (discussing that not every

addressed to the court or related to the litigation wil

deemed an appearance); North Central Illinois Laborers' Dist _____________________________________

Council v. S.J. Groves & Sons Co., Inc., 842 F.2d 164, 16 _______ _____________________________

(noting that Rule 55(b)(2)'s plain language, "has appeared in

action," evidences intent to impose a notice requirement only

limited circumstances).

12 Accordingly, we need not discuss the parties' remai

arguments regarding the existence of excusable neglect or whe

the district court abused its discretion when it awarded da

ex-parte based largely on the unanswered request for admissio

-14-


37/47

when it denied Appellants' motion to set aside the def

judgment. Not only did it fail to recognize Appellants' c

intent to defend evidenced in the February 1 letter

recognized it but decided, contrary to our holding in Mu iz,_____

notice was not required), it also failed to recognize Appella

meritorious claim that the damage award was erroneo

calculated.

Although our conclusion that Key Bank's failure


38/47

provide notice as required by Rule 55(b)(2) necessitates that

default judgment be set aside, it is less clear whether t

exists a basis for setting aside the entry of default it

under Fed. R. Civ. P. 55(c). We believe that, in

circumstances, it was incumbent upon Key Bank to live up to

representation that it would notify Appellants if it planne

seek entry of default. It is a separate question whether t

exists "good cause" for Appellants' default within the meanin

Fed. R. Civ. P. 55(c). See LeShore, 945 F.2d at 472. While___ _______

district court had occasion to consider this issue, its o

indicates that it declined to do so. We, however, are of

opinion that this issue is more appropriately resolved by

district court in the first instance on remand.


39/47

Although nothing more need be said, we nonetheless

that it would have been a simple matter for Appellee to

notified Appellants' counsel of the default proceedings. We

the language of Charlton L. Davis particularly on point:_________________

If the plaintiff felt [the defendant] was

guilty of dilatory tactics and had no

-15-

real defense, then notice under Rule 55


40/47

would have promptly resolved the matter.

Instead, plaintiff sought to reap

tactical advantage from [defendant's]

prior neglect by acquiring by stealth a

decision sheltered by the rules which

protect final judgments. Such practice

is what Rule 55 is designed to prevent.

Charlton L. Davis, 556 F.2d at 309. We reiterate that this_________________

rests upon the view that the Federal Rules of Civil Procedure

designed to be fair, that Rule 55(b)(2) was promulgate

protect "parties who, although delaying in a formal sens

failing to file pleadings within the twenty-one day period,

otherwise indicated to the moving party a clear purpose to de

the suit," H.F. Livermore, 432 F.2d at 691, and our traditi ______________

preference for resolution of cases on the merits while givin

consideration to practical requirements of judi


41/47

administration. See Cotto, 993 F.2d at 277-80; Teamsters,___ _____ _________

F.2d at 19-21; LeShore, 945 F.2d at 472-73; see also In_______ _________ _

Roxford Foods, Inc., 12 F.3d 875, 879-81 (9th Cir. 1993). ___________________

Before closing, we respond to an assertion raise

Appellee's counsel during oral argument to the effect that

appearance we found would apply only to P&S, because

February 1 letter only referred to P&S. We disagree. Admitt

the February 1 letter states that Appellee will forbear

filing a default motion based on P&S' failure to answer,___

makes no mention of the failure to answer by Sherman

Tablecloth. Nevertheless, we do not find Appellee's argu

persuasive. The record reveals that (i) Fischer launched

settlement negotiations at Sherman's request; (ii) the Februa


42/47

-16-

letter refers to Sherman as well in its discussion; (iii) She

is the president of both Tablecloth and P&S; and (iv) Appell

Complaint grounds joint and several liability on Sherman an

as guarantors of the promissory notes executed by Tablecl

which are the basis for Appellee's collection action be

Accordingly, we find it reasonable to read the February 1 le


43/47

which "serve[d] to commence settlement negotiations with

Bank] in the [action below]" as being intended to speak for

of the named defendants.


44/47

-17-


45/47

III. CONCLUSION III. CONCLUSION __________

For the foregoing reasons, we reverse the dist

court's Order, and vacate the default judgment. We leave to

district court on remand to determine whether, in

circumstances, there exists a basis for setting aside the e

of default pursuant to Fed. R. Civ. P. 55(c), and whe

Appellants should accordingly be permitted to file a

responsive pleading.13 While we disapprove of Appell

behavior, we note Appellants' apparent inattention

negotiations and to the case below during the mid-Februar

July hiatus in communications. Consequently, we decline to a

costs to Appellants.

Reversed and remanded. _____________________


46/47


47/47

proper amount of damages would then be in order.

-18-

Key Bank of ME v. Tablecloth Textile, 1st Cir. (1996)

Documents

Transcript of Key Bank of ME v. Tablecloth Textile, 1st Cir. (1996)